I am author of the book "Caring for Our Parents" and resident fellow at The Urban Institute, where I am affiliated with the Tax Policy Center and the Program on Retirement Policy. I also write a tax and budget policy blog, TaxVox, which you may read at Forbes.com or at http://taxvox.taxpolicycenter.org/ Before joining Urban, I was a senior correspondent in the Washington bureau of Business Week.

Should You Buy Long-Term Care Insurance? Maybe Not

Private long-term care insurance can be an important tool to protect against the risk of needing costly personal assistance in old age. But two respected financial economists conclude it is very expensive relative to the benefits it provides and may not be appropriate for many buyers. At the same time, a new consumer brief from the Society of Actuaries suggests how much wealth you should have for coverage to make sense.

The research paper from economists Jeff Brown and Amy Finkelstein describes many reasons why so few people buy long-term care coverage. They focus on two important issues: the effect of Medicaid’s long-term care benefit on people’s decision to buy private insurance, and the pricing and value of those policies. Their paper, in the Journal of Economic Perspectives, concludes that it does not make a lot of sense for people with few assets and little income to buy insurance, since they’ll be covered by Medicaid anyway–a phenomenon economists call “crowd-out.”

But they also find that private LTC insurance is very expensive relative to its benefits. For instance, Jeff and Amy found that 65-year-old buyers of a typical policy would get back only 68 cents for every dollar they pay in premiums. By comparison, the same buyer of a life annuity would get 75 cents to 85 cents. It is also important to note that long-term care insurance is a much better deal for women, who get back 87 cents for every dollar in premium they pay, than for men–who get only 45 cents.

The deal is even worse when Jeff and Amy include people who let their coverage lapse before they ever get benefits. In that case, a typical buyer at age 65 would get only 50 cents back on the dollar, with men getting less than 33 cents and women about 64 cents.

For several years, Jeff and Amy have also looked at how Medicaid , which provides long-term care benefits for those with very low incomes and few assets, affects people’s decision to buy insurance. They found that for many potential buyers, private insurance provides coverage they would have received from Medicaid anyway. Jeff and Amy estimate that Medicaid would cover three-quarters of long-term care benefits for a typical woman buyer of private insurance.

I have questioned how much this calculation effect matters to real people, who often have no idea that Medicaid provides a long-term care benefit. And those who do, understand how restrictive Medicaid rules are and how poor the benefit often is. Medicaid is no bargain. Still, why buy insurance for something you can get for “free” from the government?

And that helps explain why the report from the Society of Actuaries suggests that those with savings of less than $250,000 may not want to buy private insurance, while those with assets exceeding $2 million may not need to.

These are by no means hard and fast rules. For instance, wealthier people may still want to purchase insurance to preserve assets for their heirs. But, unless they face an unusually long period of care, they are probably able to self insure. Other research suggests that only 5 percent of those 65 and older will incur long-term care costs that exceed $250,000.

When it comes to long-term care insurance, I am often asked the same question: Should I buy? As these two reports suggest, the right answer is: It depends.

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Read this advice carefully … “NURSING HOME rider”. You get NO extra income benefit (and even have to pay a surrender charge to get to principal) when care starts in your own home, nor when you choose to move to assisted living next – which is where the majority of care takes place.

Properly licensed LTC agents by law must disclose if a policy only covers nursing homes and must also explicitly offer home care benefits to all applicants. Annuity salesmen perpetuate the fallacy that LTC is only about nursing homes.

Oh Howard. Smart tactic. Scare everyone from buying long-term care insurance and that adds fuel to your cause, a federal LTC insurance program. Problem is, that will be a disaster and folks who could have afforded insurance will have nothing.

Let’s add some sanity. IF you believe government benefits in 15 or 20 years will be better than they are today (for you the reader), then follow Howard’s advice.

If you believe Federal and State governments might be barely able to afford to provide benefits for the poorest among us, then you’d better do some personal planning — and that includes long term care insurance.

Howard: Here’s a faulty statement I found in your interesting article: “They found that for many potential buyers, private insurance provides coverage they would have received from Medicaid anyway.” One thing needs to be clear, and that is that Medicaid does not cover in-home care. Most people want to stay in their own homes as they age. Yes, Medicaid does provide long term care IN NURSING HOMES. Have you ever spent any time in one of them? I’ve worked in them and sued them both. I would choose any other option I could, because many nursing homes can be dangerous places. (Of course there are exceptions). Research tells us that around 80% of the residents in nursing homes are depressed. If Medicaid is being cut drastically, don’t you think it will affect nursing home care?? Is a stripped down, understaffed, poor quality nursing home where you’d like to spend the last couple of years of your own life? If so, for sure just look at economic analysis of averages and Medicaid as a “free” benefit and it will be fine. If you’d like a reality check, visit a Medicaid-bed nursing home in your area and see for yourself what life is like with the “free” benefit you think you’ll be getting. And while you’re at it, be sure to vote for any candidate for public office who thinks we need to immediately shrink government. Medicaid is government. If many politicians had their way, it would be eliminated entirely.

Carolyn, You are correct. The other issue is that in order to qualify for Medicaid benefits, you must spend down all of your assets. The CT Medicare asset protection Partnership plans allow for the member to use all of the private plan LTC benefit, receive Medicaid assistance, and retain their assets. Another solution we utilize is to offer indemnity plans that pay the client directly after going on claim. This allows them to make renovations to their home, higher a relative, etc. as they more than likely want to stay at home.

LTC is a continuing problem and will most likely become worse as the baby boomer generation reaches senior status and as we continue to be successful in battling illnesses and keeping people alive longer. For many people neither nursing homes nor home-based care is really what is needed or wanted. Bad nursing homes are a disaster and the good ones are overkill in many cases. However, for many people–especially those with little or no near-by family, those with mild dementia or vision problems, those with a home that requires upkeep and care–in-home care may not be able to provide what is needed to overcome isolation and/or the declining ability to handle the necessities of daily life. We need to be developing more facilities that can provide good living arrangements for the people in that group. An elderly relative is a good example. As she aged, we began paying for an in-home care service on a once-a-week basis that could handle basic chores and run errands. Since she lived in an apartment rather than a house, this was sufficient at the time. Then she had a stroke. She recovered sufficiently that a nursing home was not necessary (nor could she have qualified for Medicaid coverage) but it was clear she could not live on her own. We are her only relatives and live at a distance; her friends also were aging and dealing with their own health problems (and dying off, to be frank). So now she’s in assisted living. It’s not ideal, of course, but it offers a better situation than either a nursing home or in-home care. But, like in-home care, it’s not covered by Medicaid either. Because her husband was a WWII vet, she gets some assistance, which is the only reason she is able to afford the place where she is now living. But for many of us born after WWII, there won’t be any VA assistance–and then, what will we do?

Carolyn, You make some great points while Mr. Gleckman’s article seems to encourage dependance on the welfare state and discourage estate planning of any kind. In addition, the abiguous ending proves the author to be ill informed. Regards, KB

I dont feel like i should be forced to have health insurance, I think everyone would like to have health insurance if they could afford it. If you need affordable health insurance search online “Penny Medical” or you dont want to be with out insurance any time.

Such uninformed reporting! Jesse is right, this piece uses scare tactics. And incorrect scare tactics! Carolyn, your comments are along the lines of what I will say as well. Who in their right mind would choose Medicaid now, let alone when the Boomers start needing care in a Silver Tsunami? What a ridiculous line of thought. Especially affluent people. Do they want “Motel 6″ quality care or “4 Seasons” quality? Listen to the Diane Rehm show this morning interviewing an auther who wrote about family strife, vitriol and discord due to unplanned for LTC needs. This is an ages old situation that will not minimize, going forward. Qualifying for Medicaid is not without emotional and financial strife, sur le contraire. This is why a great many affluent people with net worths of over $2 million choose to own LTC insurance (LTCi). (BTW for them, LTCi premiums are truly a pittance.) Owning LTC insurance reduces a lot of family strife because much disagreement over how to get the money to pay for LTC occurs with it. All research shows the odds of needing LTC are high. For the individual, the odds are either 0 or 100% a LTC event will occur. BTW I sell a lot of LTCi to people with less than $250K net worth. Such people enjoy having dignity and love their children just as much as my affluent clients do. www.honeyleveen.com

Can you explain how those with net worth of under $250,000 pay for LTC insurance? Quotes I’ve seen are prohibitive for most people in that group to begin with. As the years pass and income remains essentially the same while both the LTC premiums and other costs go up, many of those who have had LTC have to give it up, never having received any benefit for all they money they put out. Do you have a solution for this problem?